Deutsche Telekom adjusts guidance in response to changed market

Deutsche Telekom's business development in the first half of 2006 consisted of contrasting domestic and international trends. Net revenue rose by 3.2 percent to EUR 30.0 billion, adjusted EBITDA fell by 2.4 percent to EUR 9.8 billion. Cash flow from operating activities remained almost stable at EUR 5.7 billion. At EUR 2.1 billion, net profit was also at the prior-year level. International business also continued to develop positively on the back of the mobile communications business in the United States and the United Kingdom. International revenues rose by 13.5 percent to EUR 13.6 billion. The increasing competitive pressure in Germany led to a 4.0 percent decline in revenue to EUR 16.3 billion across the three strategic business areas.

Following close analysis of the current market environment and the developments to be expected over the remainder of this year, the Board of Management of Deutsche Telekom has revised the revenue and profit guidance for the full 2006 financial year. The new guidance assumes that the trend identified to date will continue: substitution of high-margin revenue in Germany by international revenue that generates a smaller margin. Deutsche Telekom will take a much more aggressive approach to competition in its domestic markets in the second half of 2006 with price cuts, bundled products and innovations. The aim is to safeguard the customer base across all three business areas. In parallel, the company's cost base will be reduced with the accelerated conversion to an IP-based production platform and additional cost reduction measures will be put in place.

This will assist the Group management in focusing on the generation of cash flow, which will be just as important in the future as the necessary in-vestments in the market: Free cash flow before dividend payments and before investments in spectrum and network roll-out in the United States is expected to be at least EUR 5 billion in the current financial year, increasing to at least EUR 6 billion in the coming year. In both cases this is after the payments for the voluntary redundancy program of about € 1bn for each year. This focus is to be supported by strict discipline in investment. Deutsche Telekom expects to reduce its investments from EUR 10 billion this year to EUR 9 billion.

Revenue guidance for 2006 has been adjusted to between EUR 61.5 billion and EUR 62.1 billion compared with EUR 62.1 billion to EUR 62.7 billion previously. A moderate increase in revenue is expected for 2007. Adjusted EBITDA is expected to be between EUR 19.2 billion and EUR 19.7 billion, rather than EUR 20.2 billion to EUR 20.7 billion as originally expected. Adjusted EBITDA is expected to be at approximately the same level in 2007 as in 2006.

The tight focus on free cash flow is intended to safeguard the generation of funds for an attractive return on capital. With net debt of around EUR 39 billion, Deutsche Telekom is one of the companies with the strongest bal-ance sheet ratios in the European telecommunications industry.

The Board of Management intends to propose to the Supervisory Board payment of a dividend at least in line with the prior-year amount of EUR 0.72 per share. Furthermore, Deutsche Telekom will continue to invest in product innovations and in measures to sustainably reduce costs.

Strategic business areas - Germany Mobile business in Germany is marked by aggressive competition, a massive drop in prices and cuts in termination charges. In the first half of 2006, T-Mobile Deutschland's revenue declined by 3.3 percent despite an increasing customer base. T-Mobile will launch highly simplified and lower prices on the market in the fall to increase the level of cell phone usage. "New bundled offers will cost well under 10 cents per minute, regardless of which network is being called," said Kai-Uwe Ricke, Chairman of the Board of Management of Deutsche Telekom AG. T-Mobile has recorded increasing success with its current offers: The number of customers using the T-Mobile@Home option in Germany increased by almost 200,000 to more than 700,000 in the second quarter. The number of customers opting for bundle rates such as Relax or Flext throughout Europe increased to 7.5 million; 363,000 net additions were recorded in Germany alone in the second quarter. The strategy of modernizing the network with HSDPA to allow innovative products to be offered is also bearing fruit: more than 600,000 web'n'walk customers Europe-wide have opted for one of the data options with minimum monthly revenue, 300,000 of them in Germany alone.

Domestic revenue in the Broadband/Fixed Network strategic business area declined by 6.5 percent year-on-year in the first six months of 2006. The decrease in access, call and interconnection revenue had a negative impact on develop-ment, as in previous quarters. T-Com lost approximately 500,000 lines in the second quarter of 2006 as a result of customers' switching to other network operators and to the cable network, and as a result of mobile substitution. The increase in the number of leased subscriber lines remained high at 353,000, yet lower than in the first quarter of 2006 when some 400,000 lines were leased by competitors. The number of leased subscriber lines increased to around 4 million in the second quarter.

Of the lines lost, just over two thirds went to alternative fixed-network operators and around a third to mobile communications as well as telephone services provided by cable network operators.

The Broadband/Fixed Network business area has implemented various measures for the second half-year in response to this development: T-Com will launch a new pricing and product structure in the fall that is geared towards bundled products and is aimed at customers considering changing to bundled offers of alternative network operators. With the new structure, starter offers for the combination of telephone and broadband Internet will cost under EUR 40. This offer will be supplemented by services such as the "Service-Full-Flatrate," whereby a technician handles the installation of T-DSL and the configuration of the computer.

T-One, which has been available since early August and combines fixed and mobile lines, is targeting customers who do not want to give up their fixed line and regard mobile telephony as an add-on. The Broadband/Fixed Network business area responded to increasing competition from cable providers in August by launching its Triple Play services that also integrate television and offer the games of the 1st and 2nd Bundesliga soccer leagues via IPTV. The Triple Play product area will be extended during the second half of 2006 with T-Home.

The German broadband market continues to grow rapidly. As of the end of June, just under 9.0 million DSL lines supplied by T-Com were in operation - an increase of about 33 percent over the first half of 2005. Seasonal factors kept absolute growth below that of the first quarter of 2006. In the second quarter, however, the intense competition in the Internet access market was reflected in the large number of resale lines, that are operated by T-Com but sold to customers by other Internet service providers (ISP): Of the 402,000 DSL lines provided by T-Com , 387,000 were resale transactions. This brought the total number of resale DSL lines up to 2.5 million.

Adjusted EBITDA from business in Germany fell by 7 percent year-on-year to EUR 4.1 billion in the first half of 2006, mainly as a result of declining domestic revenues, expenses for newly launched products and high customer acquisition costs in the broadband market. Cost savings kept the adjusted EBITDA margin for the half-year almost constant at 37.4 percent, against 37.6 percent in the prior year.

In the Business Customers business area, revenues in Germany also declined by 5.2 percent compared to the same period last year to EUR 5.2 billion. The fall in prices and the intensification of competition in the industry both had a greater impact than predicted by market analysts. In the telecommunications services area within Business Services, which serves large and medium-sized business customers, the positive trend in the IP segment was not sufficient to offset the massive pressure on prices in the voice and data market. There were positive signs for Business Services from the IT unit, which recorded growth of around 67 percent in the second quarter. T-Systems intends to offer more stan-dardized IT packages to medium-sized business customers in particular in the future. New business in the Business Process Outsourcing (BPO) area also made pleasing progress in the first half of the year.

In the Enterprise Services business unit, which provides IT and telecommunications services from a single source for corporate groups and large public institutions, revenues in Germany fell by 7.5 percent in the first half of 2006 to EUR 3.0 billion, mainly as a result of lower revenues from telecommunications services and desktop services. In future, Enterprise Services will generate growth by providing top-to-bottom service for three sectors: telecommunications, the automotive industry, and the public sector - such as e-government projects. Measures to improve the cost structure are also planned. These include the consolidation of computing centers and servers, cutting production costs by converting the networks to Internet Protocol (IP) and intelligently linking IT and telecommunications in the health sector. These should open up fresh potential for growth over the coming years.

Strategic business areas - International

Mobile business outside Germany continues to grow. International revenue increased by almost 17 percent, but does not generate the same level of margins as the business in Germany. Adjusted EBITDA increased considerably by around 8 percent. The success story of T-Mobile USA continues, although the extension of contracts for new customers to two years caused a temporary drop in customer growth in April. With a net figure of around 613,000, T-Mobile USA thus gained fewer customers in the second quarter than in the prior year; however, monthly additions in May and June show that the trend is clearly on the up again. "Even if we will not be able to completely make up for the short-term decline in new customer acquisition in the remainder of this year, the growth engine that is T-Mobile USA keeps on purring," said Ricke.

The introduction of the Flext plan by T-Mobile UK had a positive effect on revenues in the United Kingdom, while pushing EBITDA down as expected through higher customer acquisition costs. With two-year contracts, longer and higher revenue flows can however be expected from Flext customers than would be the case with the more common 12-month contracts. Another positive factor was the ongoing roll-out of HSPDA within the network. Customer growth is to be driven forward with innovative products in order to secure future revenue and profit with high-quality products. "An EBITDA margin of 15.6 percent represents a concession to revenue growth. But we will be able to report a clear increase in these results by the end of the year," explained Ricke. The mobile communications business in Central and Eastern Europe is also developing well. 252,000 net additions were recorded in the first six months, with contract customers accounting for a good 84 percent.

In the Broadband / Fixed Network business area, international revenues improved year-on-year by 2.7 percent, to EUR 1.39 billion. This is attributable to the expansion on the broadband market in France and Spain, and to consolidation effects such as the first-time consolidation of Telekom Montenegro in the second quarter of 2005. Adjusted EBITDA for the international Broadband / Fixed Network business fell by 10.5 percent against the previous year to EUR 436 million in the first half of 2006. This is attributable to customer acquisition costs and expenditure to establish a proprietary infrastructure incurred as part of the broadband strategy in Spain and France in particular. The number of broadband lines outside Germany rose to about 1 million by the end of the first half - an increase of more than 600,000 year-on-year.

International Business Customer revenues showed a distinct positive trend compared with the previous year, rising by 13.7 percent. A major part of this was the EUR 151 million of revenue contributed by gedas, which was fully consolidated in the second quarter of 2006. New orders showed a year-on-year increase of 35 percent in the second quarter, mainly attributable to new large-scale contracts.

Deutsche Telekom Group at a glance:

Mobile Communications at a glance:

1) Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA and the adjusted EBITDA margin, please refer to "Reconciliation of pro forma figures" at “www.deutschetelekom.com/investor-relations.“ 2) Average number of employees.

Broadband/Fixed Network at a glance:

Following the merger of T-Online International AG into Deutsche Telekom AG T-Online no longer reports as a separate unit but is managed as a product brand. For reporting purposes, Broadband/Fixed Network is broken down into its domestic and international segments. The Scout24 group is reported in the domestic segment since its parent company has its registered office in Germany. 1) Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA and the adjusted EBITDA margin, please refer to "Reconciliation of pro forma figures" at ”www.deutschetelekom.com/investor-relations.“ 2) Average number of employees. Due to the transfer of the Telekom Direkt sales unit to T-Com , T-Com's workforce increased by almost 192 employees. Prior-year figures have not been restated.

Business Customers at a glance:

1) Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA and the adjusted EBITDA margin, please refer to "Reconciliation of pro forma figures" at ”www.deutschetelekom.com/investor-relations.“ 2) Average number of employees.

Group Headquarters & Shared Services at a glance:

1) Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA and the adjusted EBITDA margin, please refer to "Reconciliation of pro forma figures" at ”www.deutschetelekom.com/investor-relations.“ 2) Average number of employees.

Development of customer numbers in the first half of 2006:

1)Telephone lines of the Group (incl. ISDN channels), including for internal use. 2)Broadband lines, excluding for internal use. 3)Definition of resale: Sale of broadband lines based on DSL technology to alternative providers outside the Deutsche Telekom Group. 4)Includes customers with broadband lines on proprietary network in Spain. 5)“Customers with a billing relationship” includes Germany, Eastern and Western Europe. Eastern Europe includes Magyar Telekom, T-Hrvatski Telekom, and Slovak Telekom; Western Europe includes Ya.com and Club Internet. 6)Telephone lines excluding internal use and public telecommunications, including wholesale services. 7)Subscriber-line figures are recorded including Magyar Telekom's subsidiary Maktel and Telekom Montenegro. Prior-year figures have not been restated. 8)Total calculated on the basis of customers (broadband and narrowband rates) in Germany, in Western and Eastern Europe with a billing relationship and PAYG (pay as you go). Eastern Europe includes Magyar Telekom, T-Hrvatski Telekom, and Slovak Telekom; Western Europe includes Ya.com and Club Internet. 9)One mobile communications card corresponds to one customer. The total was calculated on the basis of precise figures and rounded to millions. Percentages calculated on the basis of figures shown. Organic customer growth is reported for better comparability: tele.ring customers were also included in the historic customer base, although the company has only been consolidated since May 2006. 10)The change in customer base in Germany in the first quarter of 2006 as compared with year-end 2005 comprises 284,000 net additions and 440000 machine-to-machine (M2M) SIM cards. M2M SIM cards are used in automated communication between machines. M2M SIM cards have been counted as customers since the first quarter of 2006 in order to bring the reporting of T-Mobile Deutschland in line with that of the other T-Mobile companies. Prior-year comparatives have not been adjusted. 11)Including Virgin Mobile 12)"Other" includes MobiMak (Macedonia) and MONET (Montenegro).

Development of customer numbers in the second quarter of 2006:

1) Telephone lines of the Group (incl. ISDN channels), including for internal use. 2) Broadband lines, excluding for internal use. 3) Definition of resale: Sale of broadband lines based on DSL technology to alternative providers outside the Deutsche Telekom Group. 4) Includes customers with broadband lines on proprietary network in Spain. 5) “Customers with a billing relationship” includes Germany, Eastern and Western Europe. Eastern Europe includes Magyar Telekom, T-Hrvatski Telekom, and Slovak Telekom; Western Europe includes Ya.com and Club Internet. 6) Telephone lines excluding internal use and public telecommunications, including wholesale services. 7) Subscriber-line figures are recorded including Magyar Telekom's subsidiary Maktel and Telekom Montenegro. Prior-year figures have not been restated. 8) One mobile communications card corresponds to one customer. The total was calculated on the basis of precise figures and rounded to millions. Percentages calculated on the basis of figures shown. Organic customer growth is reported for better comparability: tele.ring customers were also included in the historic customer base, although the company has only been consolidated since May 2006. 9) Including Virgin Mobile 10) "Other" includes MobiMak (Macedonia) and MONET (Montenegro).

This release (particularly the chapter titled “Outlook”) contains forward-looking statements that reflect the current views of Deutsche Telekom management with respect to future events. They are generally identified by the words “expect,” “anticipate,” “believe,” “intend,” “estimate,” “aim,” “goal,” “plan,” “will,” “seek,” “outlook” or similar expressions and include generally any information that relates to expectations or targets for revenue, adjusted EBITDA or other performance measures. Forward-looking statements are based on current plans, estimates and projections. You should consider them with caution. Such statements are subject to risks and uncertainties, most of which are difficult to predict and are generally beyond Deutsche Telekom’s control, including those described in the sections “Forward-Looking Statements” and “Risk Factors” of the company’s Form 20-F report filed with the U.S. Securities and Exchange Commission. Among the relevant factors are the progress of Deutsche Telekom’s workforce reduction initiative and the impact of other significant strategic or business initiatives, including acquisitions, dispositions and business combinations. In addition, regulatory rulings, stronger than expected competition, technological change, litigation and supervisory developments, among other factors, may have a material adverse effect on costs and revenue development. If these or other risks and uncertainties materialize, or if the assumptions underlying any of these statements prove incorrect, Deutsche Telekom’s actual results may be materially different from those expressed or implied by such statements. Deutsche Telekom can offer no assurance that its expectations or targets will be achieved. Deutsche Telekom does not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise. Deutsche Telekom does not reconcile its adjusted EBITDA guidance to a GAAP measure because it would require unreasonable effort to do so. As a general matter, Deutsche Telekom does not predict the net effect of future special factors because of their uncertainty. Special factors and interest, taxes, depreciation and amortization (including impairment losses) can be significant to the company’s results. Among the adjustments to be made in determining adjusted EBITDA in 2006 and 2007 will be the costs of the Group’s workforce adjustment initiative, which Deutsche Telekom estimates will result in costs and charges totaling approximately EUR 3.3 billion. In addition to figures prepared in accordance with IFRS, Deutsche Telekom presents non-GAAP financial performance measures, e.g., EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT, adjusted net profit, free cash flow, gross debt and net debt. These non-GAAP measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with IFRS. Non-GAAP financial performance measures are not subject to IFRS or any other generally accepted accounting principles. Other companies may define these terms in different ways. For further information relevant to the interpretation of these terms, please refer to the chapter “Reconciliation of pro forma figures” of this Report, which is also posted on Deutsche Telekom’s Investor Relations website at [www.deutschetelekom.com.]